By Andrew McIntyre

Law360 (March 11, 2021, 5:19 PM EST) -- Questions about the future of office space and the viability of hotels are among the unknowns for the real estate sector, one year after COVID-19 began its rapid spread across the U.S.

Experts say a year into the crisis, investors are still in a wait-and-see mentality as it remains unclear what sort of demand there will be for physical office space once the pandemic passes.

Meanwhile, future demand for hotel rooms is also an unknown, being tied to both business and personal travel.

Here, Law360 looks at three lingering questions for commercial real estate.

What Will Office Space Look Like?

The future of the brick-and-mortar office remains a major unknown as many companies have had success with the work-from-home model. Once the pandemic passes, it remains unclear just how many employees will opt to return to physical offices, and that in turn makes it difficult to predict supply and demand — and ultimately pricing.

"We're seeing some companies consider the idea of permanent working from home across the board. For any large-cap company, that's hard to pull off over the long term," said Alain R'bibo, a partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. "I think [people are] going to crave coming back to the office."

But just how quickly that return may happen and how widespread it will be remains to be seen, experts say. The question may vary from market to market.

"Office is the big question, with varying impacts depending on the geography," said Elsa Ben Shimon, a partner at Stroock & Stroock & Lavan LLP. "In New York City, San Francisco, the office market is very uncertain now. … Other cities [and] areas have held up relatively well."

Ben Shimon said office occupancy is starting to come back in Texas, Florida and Georgia, as examples.

And another question for the future of office space is the impact of technology, including the potential for new tech to improve air circulation and create more contactless spaces, Ben Shimon said.

"Companies across industries are rethinking the way they look at the office, as a necessity or not. I do think we'll be going back to the office," Ben Shimon said. "I think there will be a lot of modifications to the way that the office has been used in the traditional sense."

How Will Parties Sort Out Distressed Assets?

While the future of office space is one lingering question, another major unknown is what will come of properties that are in distress, meaning those where the owner is unable to make payments to the lender.

The hotel and retail sectors are facing the most distress, and just what will happen to the ownership of and debt on distressed properties remains a big unknown.

"We're starting to see distressed opportunities," Ben Shimon said, referring to buyers who have waited on the sidelines for opportunities to make purchases of assets that have declined in value. "I think we're going to see more distressed opportunities."

Ben Shimon said it often takes 18 months from a particular event for distressed buyers to ramp up acquisition activity. Given that we're now at the one-year mark of the World Health Organization having declared COVID-19 a pandemic, it's likely distressed buyers will become active within six months, if history is any indicator.

On the lending front, R'bibo said institutional lenders may shy away from distressed properties, and other players like debt funds may be the parties that step in to take over such properties or repurpose them.

"I think that lenders have no appetite to take back any of the distressed hospitality assets, with very few exceptions. It will more likely be a debt fund over a typical bank," R'bibo said. "There is an extreme amount of retail that does not return [after COVID-19]."

And as would-be buyers start to see opportunities to buy properties at reduced prices, there are challenges.

For one thing, underwriting remains a challenge as parties try to get a sense of the future of certain sectors, as well as what threats may come in the near term. Appraisal is also a challenge.

"You can't get to places. That will continue to be a challenge," said Bonnie Neuman, a partner and head of real estate finance at Cadwalader Wickersham & Taft LLP.

"The industry as a whole has been very flexible in figuring out how to address those challenges," she added, regarding the issues of underwriting and appraisal.

What Is the Path Forward for Hotels?

While retail was facing distress before COVID-19 and now faces challenges to overcoming pressure from online competition coupled with the impact of the virus, hotels don't have quite the same dynamics, and experts are eyeing a potential rebound in this space.

Business travel is one unknown piece of the equation, however, and it's too soon to say what sort of demand hotels will see in this area post-COVID-19.

"We don't know when or if business travel is going to return, from a hospitality perspective," R'bibo said. "People like not getting on a plane for an in-person meeting."

Just as the office question may in part be location-specific, so too could the question of the viability of hotels. Experts say trophy hotel assets in major markets will likely be hit less hard than smaller properties in secondary and tertiary markets. That same line of thought is playing out for retail, although at a more extreme clip, since retail had major challenges before.

While business travel is one piece of the picture for hospitality, vacation travel is another. On that front, as the vaccine rolls out, experts expect activity to pick up — and this will inspire more confidence in investors to do deals, Neuman said.

"We're starting to see people inquire about hotel deals. As we move into the second and third quarters, we expect to start to see a pick-up in hotel deals. People are anxious to get out of their houses," Neuman said. "Domestic hotel deals will … bounce back in a real way."

--Editing by Philip Shea and Emily Kokoll.

For a reprint of this article, please contact reprints@law360.com.